PNC Bank 2008 Annual Report Download - page 152

City), had to their officers, directors and sometimes
employees and agents at the time of acquisition. We advanced
such costs on behalf of several such individuals (including
some from Riggs and Sterling) with respect to pending
litigation or investigations during 2008. It is not possible for
us to determine the aggregate potential exposure resulting
from the obligation to provide this indemnity or to advance
such costs.
In connection with the lending of securities facilitated by
Global Investment Servicing as an intermediary on behalf of
certain of its clients, we provide indemnification to those
clients against the failure of the borrowers to return the
securities. The market value of the securities lent is fully
secured on a daily basis; therefore, the exposure to us is
limited to temporary shortfalls in the collateral as a result of
short-term fluctuations in trading prices of the loaned
securities. At December 31, 2008, the total maximum
potential exposure as a result of these indemnity obligations
was $7.9 billion, although the collateral at the time exceeded
that amount.
V ISA I NDEMNIFICATION
Our payment services business issues and acquires credit and
debit card transactions through Visa U.S.A. Inc. card
association or its affiliates (“Visa”).
In October 2007 Visa completed a restructuring and issued
shares of Visa Inc. common stock to its financial institution
members (“Visa Reorganization”) in contemplation of its
initial public offering (“IPO”). As part of the Visa
Reorganization, we received our proportionate share of a class
of Visa Inc. common stock allocated to the US members. Prior
to the IPO, the US members were obligated to indemnify Visa
for judgments and settlements related to specified litigation. In
accordance with GAAP, during the fourth quarter of 2007 we
recorded a liability and pretax operating expense of $82
million representing our estimate of the fair value of our
indemnification obligation for potential losses arising from
this litigation.
Visa’s IPO occurred in March 2008. Visa redeemed
2.2 million of our investment in Visa Class B common shares
for cash out of the proceeds of the IPO. Accordingly, we
recognized a pretax gain of $95 million during the first quarter
of 2008 in other noninterest income in connection with this
redemption. In addition, Visa set aside $3 billion of the IPO
proceeds in an escrow account for the benefit of the US
member financial institutions to fund the expenses of the
litigation as well as the members’ proportionate share of any
judgments or settlements that may arise out of the litigation.
Therefore, we reduced our indemnification liability
proportionately based upon the escrowed amount via a credit
to noninterest expense of $43 million pretax during the first
quarter of 2008.
In October 2008, Visa reached a settlement with Discover
Financial Services related to another of the specified litigation.
As a result, we recorded an incremental indemnification
liability of $13 million.
Based on the cumulative impact of this settlement and
previous settlements, Visa determined that additional escrow
funds were necessary and set aside an additional $1.1 billion
in cash for the remaining specified litigation cases in the
fourth quarter 2008. In connection with Visa’s cash allocation
to the escrow fund, Visa reduced the Visa B common share to
Visa A common share conversion ratio from approximately
71% to 63%. We determined that these actions effectively
settled a proportionate share of our estimated indemnification
liability for the remaining specified litigation. As a result, we
reduced our indemnification liability by $16 million with a
corresponding credit to noninterest expense.
As a result of the acquisition of National City, we became
party to judgment and loss sharing agreements with Visa and
certain other banks. The judgment and loss sharing
agreements were designed to apportion financial
responsibilities arising from any potential adverse judgment or
negotiated settlements related to the specified litigation. The
acquisition of National City resulted in the recognition of an
additional indemnification liability of $224 million. As a
result of the indemnification provision in Section 2.05j of the
Visa By-Laws and/or the indemnification provided through
the judgment and loss sharing agreements, PNC’s Visa
indemnification liability at December 31, 2008 totaled $260
million.
R ECOURSE A GREEMENTS
We are authorized to originate, underwrite, close to fund and
service commercial mortgage loans and then sell them to
FNMA under FNMA’s DUS program. We have similar
arrangements with FHLMC.
Under these programs, we generally assume up to one-third of
the risk of loss on unpaid principal balances through a loss
share arrangement. At December 31, 2008, the potential
exposure to loss was $5.7 billion. Accordingly, we maintain a
reserve for such potential losses which approximates the fair
value of this exposure. At December 31, 2008, the unpaid
principal balance outstanding of loans sold as a participant in
these programs was $18.6 billion. The fair value of the loss
share arrangement in the form of reserves for losses under
these programs, totaled $79 million as of December 31, 2008
and is included in other liabilities on our Consolidated
Balance Sheet. If payment is required under these programs,
we would not have a contractual interest in the collateral
underlying the mortgage loans on which losses occurred,
although the value of the collateral is taken into account in
determining our share of such losses. The serviced loans are
not included on our Consolidated Balance Sheet.
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